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Friday, February 28, 2014

Merkel's big speech yesterday was being trailed in the UK media almost a week in advance while the German media only began to cover it the day before. Its fair to say it didn't completely dominate the news in Germany yesterday - not with the conclusion of the trial of former German President Christian Wulff - but it nonetheless attracted a lot of coverage, comment and analysis. Here is our round-up of key German responses:

In terms of the speech itself, German media and commentators broadly picked out Merkel's call for the UK to stay in and help shape the EU, although N-TV went with “Merkel leaves Cameron hanging”. Today's headlines and comment pieces make for interesting reading; FAZ headlined their write-up with ‘Chancellor Jein' - Jein, for those who haven't worked it out already is a combination of Ja & Nein. Süddeutsche Zeitung goes with “Merkel’s lecture in Europe realism” adding that “she didn't close doors but remained vague”. Die Welt says “Merkel meets the Queen and resists Cameron”.

“The UK and Germany share a staggering amount of common ground... the list of common interest has now even been extended by a very important point: both Germany and the UK want to readjust the institutional structure of the EU... [However] even if the Chancellor wanted to she could not give Cameron a special status [for the UK in the EU]... Merkel has offered a limited EU treaty change for the Eurozone and that the EU Commission will voluntarily commit to stay out of specific policy areas. Now the ball is in the British court.”

Die Welt columnist Alan Posener writes in the Guardian that:

“Cameron will get his treaty changes sooner or later. In return, he should learn to walk the European walk and talk the talk – as Merkel does, while pushing a German agenda.”

In a separate comment piece in Die Welt, Posener argues that a more integrated eurozone but with the possibility of other powers flowing back to member states would

“not create a Europe of ‘two-speeds’, but a freer Europe of differences and choices. Those who want more integration should be able to go down that path; those who prefer a looser European ‘dress’ should not have to leave the EU for that”.

“Those, like the British Premier David Cameron, who hope for a herculean reform effort of the EU, including comprehensive treaty change, do not understand the EU. Europe moves cautiously, step by step, fittingly like the German Chancellor, with or without crutches.”

He adds that Merkel’s speech understandably left a lot of questions unanswered such as

“What are the concrete plans for the strengthening of the economic and monetary union? Should governments agree on a common economic policy or does this competence go to the [European] Commission? Above all in terms of the Commission: which of Cameron’s complaints about Brussels are justified? Where do competences have to be checked and be trimmed back?”

In conclusion the broad response of the German media is much as we argued yesterday - Merkel did not give much away but left the door open to reform.

Thursday, February 27, 2014

Chancellor Angela Merkel has delivered her much hyped and anticipated speech to both Houses of Parliament - so what conclusions can we draw and was it good or bad news for David Cameron's EU strategy?

In short, Merkel delivered a very statesmanlike speech but there was little new here.

The Chancellor was never going to set out a definitive list of reform proposals or endorse/reject Cameron's EU reform agenda. She made the point explicitly in (perfect) English that her speech would disappoint both those who hoped it would "pave the way for a fundamental reform of the European architecture which will satisfy all kinds of alleged or actual British wishes" and those who expected she would "deliver the clear and simple message that the rest of Europe is not prepared to pay almost any price to keep Britain in the European Union".

Here are some of our key observations:

Merkel opened with a long passage about Britain's role in both world wars and its commitment to Europe's democratic values. She emphasised that "the UK has no need to prove its commitment to Europe". This was a clever gesture of diplomatic goodwill that she didn't necessarily have to make. She also highlighted Germany's view that the EU remains a vehicle to ensure stability across the Continent.

There were few specifics but she made it clear that in order to strengthen the eurozone the EU treaties will have to be adapted in a “limited, targeted and swift” manner, adding that if the UK and Germany show they are serious about reform, they will find the legal mechanisms to make it happen.

In terns of EU reform generally, she stated that that Europe had to change to adapt to new realities - a clear acknowledgement that the status quo is untenable. She said the EU policies needed to be evaluated by all member states. "For all EU member states it is essential that all EU policies – whether energy and climate, shaping the single market or external trade relations – have to be measured by whether they contribute to the European economic strength or not," she said.

Merkel reiterated her statements on the need to cut red tape and ensure the EU is competitive.

She emphasised the benefits of the four freedoms of the single market and that they are inseparable, but added that "it is also true that, to maintain and preserve this freedom of movement and gain acceptance for it from our citizens... we need to muster the courage to point out mistakes and tackle them" - a clear hint at the possibly of reforming the rules around EU migrants' access to benefits. She further expanded on this in the press conference by pointing out that free movement could not involve unrestricted access to benefits and that this was as much of a concern in Germany as in the UK.

Merkel called on the EU to be more outward looking, particularly given that 90% of global growth over next five years will take place outside EU, despite it occupying 25% of the global economy. She was clear on the need for the EU-US free trade deal (TTIP).

She also argued that the principle of "subsidiarity must be respected more in Europe".

She stressed the importance of the City of London to the EU economy - a nod to those who fear that the City remains in Brussels' sights.

While Merkel stressed the need for the EU to change economically and politically, the was little more on addressing the EU democratic deficit, which Cameron has been keen to emphasise.

In summary, Merkel's speech was a statesmanlike address. The rhetoric reflected Germany's cultural and historical affinity with the EU but, without being specific, Merkel was equally clear about the need for the EU to change. She added, "Our ideas of how the future European Union ought to look like may vary on the details but we, Germany and Britain, share the goal of seeing a strong, competitive European Union join forces."

Her pitch to Cameron could be summed up with her comments that "we need a strong United Kingdom with a strong voice inside the European Union. If we have that, we will be able to make the necessary changes for the benefit of all." As we noted in our briefing, there is ample scope to translate these shared principles into concrete reforms which would attract a lot of public support in both countries. It is also worth remembering that when it comes to reforms, Merkel is a believer in a more gradual, step-by-step process as opposed to the huge all-encompassing package that many UK observers are looking out for.

It is now up to David Cameron to put forward concrete policy proposals, not only to the German Chancellor but to the wider EU negotiating table.

The results suggest that Germans are split on the future development of the EU. While 38% say they’d like a more integrated Europe with more decisions taken at the European level, 31% say they’d like a less integrated Europe and 9% favour complete German withdrawal. 14% favour the status quo.

Among British respondents, a less integrated Europe with more decisions taken nationally or locally, is by far the most favoured option (37%). 24% want complete British withdrawal, 15% favour the status quo and only 10% would like more integration with more decisions taken at the European level. This illustrates that rather than a straight in or out choice, the British public has a clear desire for reform. It is now up to the UK Government to deliver a clear reform programme.

While more German than British respondents were sympathetic towards the prospect of more EU integration, a majority in both countries think that national parliaments rather than the European Parliament should be the ultimate check on new EU laws (see graph above, click to enlarge).

In the UK, 55% believe that every country’s national parliament should have the right to block new EU laws and 18% believe that a group of national parliaments working together should have the power to block EU laws – a total of 73%. In Germany, 36% favour a veto for the Bundestag over new EU laws and 22% are in favour of a group of national parliaments being able to block EU laws – a total of 58%. Only 8% of Britons and 21% of Germans think the European Parliament, rather than national parliaments, should have the right to block new EU laws.

Furthermore, in four out of six key policy areas – EU migrants’ access to benefits, police and criminal justice laws, employment laws and regional development subsidies – a majority in both countries said that decisions should be taken at the national rather than at the EU level (see table above).

Of the EU’s three flagship projects – the single market, enlargement and the euro – the single market was considered to be beneficial by the biggest share of voters in both countries. 52% of British voters said the single market is beneficial while 26% said it is not beneficial and 23% are undecided. 74% of German voters said it was beneficial, while 19% said it isn’t, and 8% said they don’t know.

Both British (55%) and German (48%) voters tend to view the impact of EU migrants on their country negatively. A smaller share of voters in both Britain (42%) and Germany (42%) said EU migrants negatively impacted on them personally, while a larger share in Germany (41%) than in Britain (30%) feel that EU migrants have a positive impact on them personally.

Plenty of scope for agreement then, but we’ll end on a note of caution. Merkel remains keen on a step by step approach and is somewhat hamstrung by her new coalition partners. Cameron will have to secure a much wider base for reform than just her, while she is also more likely to publicly back him if he has formed other alliances.

We won’t do a country by country run down again, since little has changed. But we pick up on a few general themes below.

Inflation forecast cut
A metric which everyone is watching at the moment is inflation. As we have discussed before, March has been pegged as a key meeting for the ECB and is expected to be a defining choice over whether the bank takes more action to tackle inflation. The EC has cut its forecast for inflation from 1.5% to 1.1% for this year while last year’s has been revised to 1.3% from 1.5%. Despite the language being quite strong on inflation remaining low and subdued, these forecasts aren’t far from the ECB’s own and are unlikely to push them one way or another when it comes to taking further action. The graph also highlights that the view of core inflation (without energy or food prices) been on a slow decline for some time but is expected to melt upwards over the coming years. Again this fits with current ECB thinking rather than bucking against it.

Spain and Italy – diverging forecasts, but plenty of common problems
One of the more surprising points is that Spain has got the most substantial upgrade of all the big eurozone countries – with its 2014 growth forecast raised from +0.5% to +1%. At the same time Italy is the only big eurozone country whose growth forecast for this year has been revised downwards – from +0.7% to +0.6%. Similarly, on the unemployment side (while Spain remains in a much worse position) the forecast has improved somewhat for Spain and worsened for Italy. In any case, both continue to struggle with their large debt loads (more below), although new Italian Prime Minister Matteo Renzi might take the less than optimistic forecast as an important reminder of the reforms he needs to pursue, not unlike the ones Spain has undertaken…

Debt remains a problem in the eurozone
By 2015, seven eurozone countries are forecast to have public debt levels above 100% of GDP – Belgium, Ireland, Cyprus, Greece, Spain, Italy and Portugal. As the report warns, this debt overhang could become a drag on medium term growth, particularly when combined with other factors such as the knock on effects of years of depressed investment, high unemployment and falling productivity.

Borrowing costs for SMEs have come down but remain divergent in eurozone
As the graph highlights, there has been some improvement over the past few months. That said, borrowing costs for firms in France and Germany remain substantially below those in the periphery countries. Given the importance for SMEs, particularly in Italy and Spain, it is difficult to see a strong pick-up in economic activity or employment until SMEs can fund themselves effectively at reasonable rates.

Transition from export driven growth to a more balanced recovery
The EC suggests that the recovery is and will become more broadly balanced. As we have warned, particularly with regards to Portugal, becoming overly reliant on exports can be dangerous as it’s not clear that there will be sufficient demand to pull the economy out of its slump. That said, the Commission doesn’t entirely provide convincing ground for the significant turnaround in domestic demand and investment which is expected. With firms and households still weighed down by significant amounts of debt in much of the periphery and borrowing costs remaining high, it’s not yet clear that this can take place as quickly as is hoped. As the graph below shows, the turnaround needed is substantial.

Labour market continues to lag behind
Even if you buy into other parts of the recovery, it’s clear it hasn’t yet come close to improving the serious unemployment problem in much of Europe. Divergence is also expected to remain with many of the peripheral countries having incredibly high unemployment for the foreseeable future (well beyond the timeline of these forecasts).

And finally, seriously, what’s wrong with Finland? This data marks another bad day for the Finnish government, with the Finnish economy forecast to grow by only 0.2% this year, the slowest level behind Cyprus (-4.8%) and Slovenia (-0.1%), both embroiled in the eurozone crisis.

Monday, February 24, 2014

Ukraine’s future is in the balance. It could move closer
towards the EU, Russia or both at the same time. It could remain a unified
state, split in two or conceivably be invaded by Russia. Here are some of the
scenarios which we've ranked according to their probability.

Closer ties with the EU - Ukraine was due to sign
an association agreement with the EU, the cancellation of which caused the
crisis in the first place. With a new government and Ukraine on the brink of
financial default Ukraine will be looking for EU help and finance. Full EU membership, and
certainly NATO membership, will remain off the table but the original trade
agreement looks likely to be signed.

Partial reconciliation with Russia - It is highly unlikely that the new government will wish to
move closer to Russia, and will not wish to join Russia’s Eurasian Customs
Union (itself incompatible with the EU deal). That said Ukraine cannot ignore
Russia - it is dependent on it for its energy, it has substantial debts with Moscow and it is its largest trading. There is also the question of
the large Russian minority and Russian speaking minority that would strongly oppose Ukraine distancing itself from its Eastern neighbour. Much depends on the pragmatism of the new Ukrainian government, the Russians (President Putin in particular) and the EU - ultimately it is in the interests of all sides to ensure stable political and economic relations.

Remain a unified state - Although the ethnic/linguistic divides are stark (see below) the split is not as straightforward as it looks. There are ethnic
Russians (in the Crimea), ethnic Ukrainians who speak Russian as well as other
minorities. The revolution was undoubtedly triggered by Yanukovich's decision to opt for closer ties with Russia and not the EU but widespread discontent fuelled by corruption and bad governance were crucial in bringing things to a head. As long as the new government
is inclusive, remains on good terms with Russia and avoids antagonising the
Russian minority too much the state should hold together.
﻿

Divided - but how?

Disintegration - If the new Ukrainian Government - backed with financial support from the EU - decides to ignore the concerns of Russian speakers in the East it risks provoking an insurrection in these regions. The
ex-President is still at large and could be a focus for areas wary of coming
under the control of the protest movement that they did not support. The most
dangerous flash point is in the Crimea, which only joined Ukraine in a transfer
organised by the Ukrainian Soviet supremo Khrushchev. Crimean Secession seems
unlikely for now but it’s worth remembering the Russian Black Sea
fleet is based here.

Invasion by Russia - There is a danger that if Russia feels frozen out of the
Ukraine all together it could act as it did in Georgia in 2008 and seek to
intervene in support of a proxy interest. In this case, if the new government
were to threaten Russian interests or ethnic Russians in the Crimea, it could
prove a pretext for Russian intervention. Russia could back secessionists or
act in its own interest and annex the Crimea. Russia would pay a heavy price
(Ukrainian military action and western retaliation on its fragile economy) so
for as long as its interests are secure this remains an extreme scenario.

The stakes are high for the European Union. Ukraine has many
links to EU states – parts of its territory have been part of Austria,
Hungary, Czechoslovakia, Poland, Romania and further back Lithuania – but the
EU should be careful. Russia has an equal claim to close relations with Ukraine
and any mutually exclusive deal with the EU will raise tensions. The new
government and the EU should of course establish good relations, but Russia
needs to be a part of the process and so too does the large Russian
speaking population in Ukraine – the EU risks confrontation if they are not included in the process.

Ahead of German Chancellor Angela Merkel’s visit to London to meet David Cameron on Thursday, we've published a new briefing setting out the chances of an Anglo-German bargain on EU reform, the areas of possible agreement and also the potential hurdles to a deal.

In summary, Germany remains the most important ‘swing state’ in the debate about the EU’s future, and the outline of an Anglo-German bargain on EU reform is emerging. Angela Merkel’s CDU party is expected to argue in its European election manifesto that it should be possible for EU powers to return to national governments, and Germany and the UK are already among the most vocal advocates of reforming rules on EU migrants’ access to state welfare. Crucially, Germany’s desire to put further Eurozone integration on a sounder constitutional footing and enforce economic supervision on other Eurozone economies could also present David Cameron with his best chance of securing an EU Treaty change. Germany has already shown itself to be sympathetic to UK concerns about the Eurozone writing the rules for all member states.

Looking at this issue through the prism of individual policy areas, there is plenty of scope for Anglo-German agreement:

However, the presence of the SPD in Germany’s Grand Coalition has made matters more complicated and potentially limits how far Chancellor Merkel is able to go. This makes it all the more important that the UK wins support for its reform agenda in as many like-minded countries as possible, allowing Merkel the cover she needs to back it. There remains no guarantee that an EU Treaty change will coincide with Cameron’s 2017 referendum timetable but while this would be a blow, much reform can nevertheless be achieved without it.

Thursday, February 20, 2014

Dutch Prime Minister Mark Rutte will travel to London to meet David Cameron tomorrow and discuss various EU-related issues. Ahead of the visit, Dutch Foreign Minister Frans Timmermans gave an interesting keynote speech on Europe in Rotterdam yesterday - laying out a few issues Cameron and Rutte may discuss at their meeting.

It would be an exaggeration to suggest that Europe without the EU would slide into war, but it would also be naive to think it would be better if everyone went their own way.

The idea that it would be in our interest to leave the Union strikes me as nonsense…But this does not mean that there are no drawbacks. European solidarity has a downside, and we should not try to conceal it. The government recognises this fact and is working with other member states to tackle the adverse effects of the free movement of persons, for example.

Sovereignty is a paper tiger. In today’s world, if you want to serve Dutch interests you need influence…But that does not mean giving the EU carte blanche to arrogate more powers to itself. The European Union needs to be modest and understand that there is no Union without the member states…The EU exists by the grace of the member states and their democratic institutions. The EU would do well to secure greater involvement in Brussels decision-making by those democratic institutions, governments and parliaments.

We are making proposals to bolster the role of national parliaments, and [we] favour a smaller European Commission focusing on core tasks. The system of yellow and red cards, which allows MPs in national parliaments to intervene, must be further strengthened. And the Commission mustn’t brush yellow cards aside. National MPs represent national voters and their involvement in the European debate is essential.

I am optimistic. Optimistic about Europe’s capacity to find a new direction. Optimistic about our ability to reform the EU so that it works for us all in an efficient and cost-effective manner...There is no need to rewrite the [EU] treaties. What we need is for the European Council, the European Parliament and the European Commission, shortly after the elections in May, to reach a political deal setting out what the EU’s priorities will be over the next five years, and in what areas the EU will refrain from activity, so that those areas can be left to the member states.

We've stressed that the Netherlands is emerging as a 'thought leader' on EU reform. The line of the Dutch government is clear: European where necessary, national where possible.

Timmermans's latest speech illustrates that there is plenty of common ground for the UK and the Netherlands to work on. The one snag for Cameron, though, is the repeated Dutch opposition to EU treaty change - something which Cameron has said will be part of his renegotiation. Perhaps we will know more on the treaty change front after the visit of German Chancellor Angela Merkel next week...

Wednesday, February 19, 2014

The Government has today announced the details of the "minimum earnings threshold" that will be applied from 1 March to EU migrants seeking to claim certain benefits in the UK. The plan was first outlined in David Cameron's FT article last year, and the DWP has today revealed the details.

Under the new system, EU migrants will have to demonstrate they have earned around £150 a week - the level at which employees pay National Insurance contributions - for three months in order to qualify for "worker" status, which opens the door to certain benefit entitlements. Jobseeker's will need to wait three months before getting income-based jobseeker's allowance and, after the introduction of new rules on April 1, they will be ineligible for housing benefit. Those deemed not economically active would need earnings above income support levels and comprehensive sickness insurance, to be eligible to claim child benefit or child tax credit.

In our briefing following David Cameron's article in November 2013, we noted that the proposal for an earnings threshold had the potential to intensify the legal stand-off between the Government and the European Commission over the rules on access to benefits.

The Court of Justice's case law makes clear that part-time workers, trainees and au pairs can be classified as 'workers', provided their activity has an economic value and is genuine and effective. This case-law makes clear that a definition of a worker according to the amount he or she earns is not compatible with EU law.

This is only an initial reaction and the Commission cannot take further action until it has reviewed the proposals. But, as we understand it, the Government will argue that it is not illegal because the threshold simply acts as an 'alarm bell' at which point claimants will face a fuller assessment of whether their work is "genuine and effective", with the possibility of being denied worker status.

This extra step means that the threshold is not an automatic criteria and should therefore fulfil the EU requirement that each applicant be assessed on their individual case.

What the Commission will make of this argument we cannot say but, as we have argued before, rather than the constant battling between the Commission and member states on this issue (it's not just the UK), the rules on access to welfare need proper reform, with a much stronger link between access to welfare and an economic contribution to the host country.

Update 13:45 - According to Antonio Delgado, Spanish Public Radio's EU correspondent, "diplomatic sources" have indicated that the UK, the Netherlands, Italy, Spain and Bulgaria are all "not keen" on sanctions, although the Italian Foreign Ministry issued a statement claiming that “In the event of the continuation of violence, we don’t rule out resorting to exceptional restrictive measures”.

Commission President Jose Manuel Barroso on the other hand is optimistic:

*****Original Post*****
The escalation in violence in Kiev yesterday and overnight poses a huge challenge to the EU. What, exactly, can it do here to prevent continuing civil disorder on its doorstep?

As ever when it comes to EU foreign policy, the first hurdle is to actually secure an agreement among 28 member states which is difficult in itself. As we've said on a number of occasions, Catherine Ashton's European External Action Service cannot magically replace 28 foreign policy positions - this has been proved time and again over Israel/Palestine, Libya, Syria etc. When it comes to the Ukraine, these differences have been apparent in how to deal with Russia in the first place, how hard it was to push for the EU-Ukraine trade agreement, then over how to deal with the anti-government protests, and now it looks likely they will appear in whether to impose sanctions. Here is a round-up of where the key EU countries stand on potential sanctions:

UK - Europe Minister David Lidington has condemned the violence and urged "all parties to return to the path of compromise and genuine negotiation" - no explicit reference to sanctions.

Poland - As the biggest supporter of Ukraine's eventual integration into the EU, Poland has consistently taken a hard stance on the issue. Speaking in the Polish parliament this morning, Prime Minister Donald Tusk called for targeted sanctions against those individuals "responsible for the Ukraine's misfortune". However, he conceded these tended to have limited effectiveness, but argued they sent a "moral" signal. He also slammed Russian pressure and warned that a civil war was possible. In a rare outbreak of political unity, the sanctions were also backed by the opposition Law and Justice party.

Germany - The German government (and the SPD in particular) has traditionally been very cautious when dealing with Russia so as not to alienate Moscow unnecessarily. For this reason they had opposed sanctions - supported by many in the European Parliament - but Foreign Minister Frank-Walter Steinmeier yesterday noted that personal sanctions will now "surely be considered". Chancellor Merkel will discuss the situation with President Hollande later today.

France - French President Francois Hollande said that he “agreed with [Polish PM] Tusk on the need for swift European sanctions, targeted at the main responsible for these acts.”

Italy – It is unclear whether Rome's position will change following the recent developments and/or the appointment of Renzi's new cabinet but the existing position was to oppose sanctions, with Foreign Minister Emma Bonino arguing a couple of weeks ago that "it has always been easy to announce [sanctions], but it has never been easy to apply them in a coordinated fashion. To me, this doesn't seem the way to go.”

Sweden - Another strong supporter of Ukraine's EU ambitions and of the anti-government protectors, Swedish Foreign Minister Carl Bild is as expected shouting the loudest, accusing Ukraine's President Yanukovych of "having blood on his hands".

Of course agreeing on a course of action is one thing - implementing it is another and the EU simply struggles to back up its rhetoric with 'hard power' due to the nature of the EU itself. The key will be how Putin responds if the situation continues to get out of hand - how will the EU respond if Moscow intervenes more directly? As the 2008 Georgian crisis showed - when the EU initially tried to present a common front - the Russians are very adept at exploiting any divisions and they still wield substantial leverage due to the reliance of many EU members on their energy resources.

Notwithstanding the need for a political solution to Ukraine's internal problems, there is surely a wider need for the EU and Russia to come to a sensible compromise over Ukraine's future - as the map below shows, geopolitically, the Ukraine is trapped between two large political and economic blocs (the map shows the respective customs union and potential members), and any closer political and economic integration of the Ukraine into the EU triggers Russia's age-old fears about 'encirclement'.

Tuesday, February 18, 2014

With the European Parliament elections approaching, the number of EU-related opinion polls is growing. Beyond the mere voting intentions, these surveys help get a clearer picture of how citizens see Europe in various countries.

Two separate opinion polls published in France over the past few days caught our attention. Just in case you don't read our press summary every day - France is a particularly interesting case, given that the anti-EU Front National may well win the most votes in the upcoming European Parliament elections.

The first poll, conducted by IFOP and published by French news site Atlantico over the weekend, found that 59% of French would be in favour of France "reconsidering the Schengen agreements [which created a passport-free travel zone in Europe] and restraining the conditions for the circulation and the establishment of European citizens on its territory."

A separate OpinionWay poll for Le Figaro and LCIfound that, while a solid majority of French want to keep the euro, the number of those against a return to the franc dropped from 62% to 53% since April 2012. Also, the share of respondents who think EU membership is "a good thing" for France went down from 48% to 42% over the same period - again, still a relative majority.

Interestingly, one of the questions in the poll was, "Which one of these feelings comes to mind when you think of the EU?" Well, 45% said 'disappointment', 18% 'hope' and 12% 'indifference'.

It would be exaggerated to claim that the French are turning their back on the EU, but the winds do seem to be changing somewhat, and the French electorate seems to be shifting towards a less idealistic approach to the 'Europe' issue. Looking at the bigger picture, this also highlights that, without sweeping reform of the EU, the risk is that voters will increasingly turn to anti-EU and anti-immigration parties - and potentially throw the baby out with the bathwater.

An increasing number of politicians across Europe have realised this, including in France. Rachida Dati, a French MEP from the centre-right UMP party, told our pan-European EU Reform Conference last month that the "disregard" of the EU elite for the citizens had to stop, adding that "it is the peoples that must impose their will to Brussels and not the other way around".

Monday, February 17, 2014

The UK must be the first country, with the forthcoming Scottish and EU referenda, to simultaneously have an intense political debate about the difficulty or otherwise of both joining and leaving the EU. Traditional assumptions are being bent in all sorts of directions, with senior UK politicians approvingly citing EU Commission President Jose Manuel Barroso for suggesting it would be “very difficult, if not impossible” for an independent Scotland to join the EU.

Like Catalonia in Spain, rightly or wrongly, Alex Salmond’s case rests in part on the argument that "if we leave one club, we can safely join another." It’s an insurance policy against the uncertainty which is a such a killer in any referendum to change the status quo. So is Barroso right?

Iceland’s accession talks with the EU – which were terminated since the Icelanders turned cold on the idea – would, in purely legal terms, come close to those of Scotland. Iceland is part of the European Economic Area, and therefore almost an EU member. Scotland has been an EU member for 40 years. Both would face tricky negotiations, like protecting their fishing industries.

There are basically six steps (by my rough categorisation). Salmond’s biggest problem is that for half of these, each of the 28 EU states, including rUK and Spain, has a veto:

Step 1 – Scotland applies to join the EU: Under EU law, it would have to be an independent country to apply.

Step 2 – The European Commission “screens” Scottish law to see if the country is compatible with EU membership – this won’t be an issue.

Step 4 – The EU and Scotland begin negotiations over individual EU policy areas. There are now 35 so-called “accession chapters” covering everything from the euro to employment law to the EU budget. Each country has a veto over the decision to both open and then to close every single chapter – ask Turkey how easy that has proven (read: Cyprus and France). It’s in these talks that Salmond would need to deliver on his pledge to get an opt-out from the euro, as well as replicating the UK’s special deals on the EU budget, crime and immigration and passport controls.

Step 5 – When the 35th chapter is agreed, the Accession Treaty with the Scottish terms of entry is drafted.

Step 6 – This Treaty must then be ratified by the Parliaments of each EU country and the European Parliament. If one says no, the deal falls.

Iceland officially applied to the EU in June 2009. In 2013, when the bid was dropped, it had completed about a third of the negotiations. So if the letter of the law is followed, Scotland might join the EU just before Serbia, several years from now.

However, in the EU, political expediency tends to trump the letter of the law. I suspect that, given the stakes, if the Scots do pull the trigger, the EU will engage in the kind of legal acrobatics that it’s proven so good at in order to fast-track an independent Scotland to membership, with or without a euro opt-out (though, as Andrew Lilico has pointed out, there might be a range of practical currency issues).

No matter what, it would be a mess. In truth, we have little idea what’s going to happen if Scotland goes independent. And I suspect that in itself undermines Salmond’s case.

Friday, February 14, 2014

That seems a strange question to ask. The country is a paid-up member of the eurozone core and is one of the few countries in the world to have a triple A credit rating from all three top agencies (S&P, Moody's & Fitch) and a stable outlook from all.

GDP growth has stagnated and is now teetering on the edge of slipping into its third recession in six years. But what has been causing this? The chart below on the right provides some insight.

The first point to note is the collapse in the electrical and electronics industry. This has been largely down to the struggles of Nokia. Formerly a dominant player in the telecoms market the firm has failed to adapt to the changing nature of the market, in particular the smart phone phenomenon, and has seen its market share, profits and share value eroded. The sector has also suffered knock on effects of the reduced global demand in the wake of the financial crisis, the threat of low cost emerging markets and the struggling domestic demand due to falling confidence.

Similarly the large metals industry has also been hit by the global downturn and has struggled with price competitiveness. In particular the ship building industry would have been doubly hit by the struggles in global trade and is yet to truly recover.

It was previously said that Finland lived off its forests. This is no longer true, or at least it is no longer able to fully. The forest industry and the related wood, textiles and paper industry have struggled with changing technologies. Demand for paper and related products has fallen substantially as digital replacements grow and environmental concerns take hold. Again cheap emerging market products may also threaten in this area.

The combination of all this has been falling employment and an accompanied fall in domestic demand, keeping downward pressure on the economy. At the same time Finland is also beginning to run into the same demographic problem facing much of the developed world – the decline of the working age population and the increase in the number of dependants.

It’s clear that Finland remains a very strong and healthy economy. However, it is clearly undergoing some serious structural changes and may continue to post low growth figures for some time to come. Fortunately, public debt remains low at around 59% of GDP, while the deficit continues to be under control at 2.4% of GDP, and unemployment remains at just 8.1% despite recent increases. This should give the country plenty of space to conduct the structural changes needed.

That said, the case of Finland provides further evidence (as we have pointed out for Germany) that the peripheral eurozone countries aren’t the only ones undergoing significant changes.

The Swiss referendum #CHvote to cap the number of EU migrants has sparked strong reactions across Europe. But would other European people vote differently if they were to be asked?

An Infratest dimap poll for Deutsche Welle from Wednesday suggests that a relative majority of Germans would like to restrict immigration as well. 48% say they are in favour of capping migration, while 46% are not. A very close call. Note though, that the question was about "immigration" in general rather than "EU migration".

When broken down by party affiliation breakdown, it's clear where these views are most concentrated: 84% of Alternative für Deutschland's supporters say they want a cap on migration. 51% of Angela Merkel's CDU/CSU say the same. Meanwhile, the Greens are least keen, with only 29% supporting the cap.

Thursday, February 13, 2014

With little fanfare, the Government has today published the second round of Balance of EU Competences reports – now making it 14 reports published in total. We won't accuse the Government of seeking to bury the latest batch of reports in the week of the worst UK floods for decades or a major announcement on an independent Scotland’s inability to use Sterling. Rather, it probably wanted to get them out before parliamentary recess.

However, the reports are a mixed bag with the most controversial one - free movement of workers - still missing. While the individual reports contain tales of dissatisfaction with the status quo and EU over interference within policy areas, the reports remain largely descriptive. None of the reports draws any deep conclusions on the broader balance of power between Westminster and Brussels, which they clearly didn't set out to do.

Some of the other reports are far better than others. The Trade and Investment report is genuinely interesting, for example. While some disagree with the report’s conclusion that membership of the customs union and the single market represents the best option on offer for UK trade, the report does at least engage with the alternatives and key debates, such as whether the EU is trade diverting or creating and the fact that the European Parliament can be a liability in trade talks.

We agree that on trade grounds the UK is at the moment better off inside (a reformed) EU.

The Transport report expresses concern about EU action that “fails to take account of the distinct circumstances of Member States with peripheral geographic locations, such as the UK.” The Environment and Climate Change report also contained some interesting factoids. The House Builders Federation for example noted that “in some areas 85% of Community Infrastructure Levy is required for mitigation of the Habitats Directive 92/43/EEC, leaving little funding for schools and roads, commenting that this is disproportionate and unsustainable.” And that EU rules can add 18 months to the life cycle of a planning application.

These reports present a useful catalogue of the extent to which the EU now permeates almost all aspects of the UK economy and society, and the logical conclusions of the transport and environment papers is that we need to do more to maximise the EU's trade opportunities but also have some seriously effective mechanisms to fight over-regulation, such as "red" and "green" cards for national parliaments.

Still, the desire for these reports not to reach any ‘controversial’ conclusions, whilst understandable on one level, has created another problem for David Cameron. European partners, media and his MPs may eventually ask ‘Why commission a review that seemingly contradicts your own policy?’ And why seek change when the "evidence" shows that everything is all well apart from some problems at the margins. We still think the basic idea behind the BoC is sound but there's a problem with what this exercise has turned into. It's not so much an attempt to assess the balance of powers but a descriptive public consultation. In its attempt to avoid drawing conclusions, it is doing precisely that, even when the wider criteria against which to measure EU involvement - which should be the point of this exercise - is absent.

“…Over the last 20 years a Media Programme has supported some highly acclaimed British films including This is England (Shane Meadows, 2006), The King’s Speech (Tom Hooper, 2010) and The Iron Lady (Phyllida Lloyd, 2011). In 2010, UK companies received €8.7m to support the production, distribution and screening of films in the UK, and over €6.7m was invested to boost the European cinema releases of over 40 British films.”

That a report drafted by the Department for Culture, Media and Sport with evidence submitted by various organisations drawn from the culture sector should conclude that the EU’s culture competence is “an important source of funding for the sector, as a driver for new creative partnerships, and as a vehicle for promoting the UK’s ‘soft power’” is hardly a surprise.

The Balance of Competence Review process was meant to provoke debate about the impact of the EU on the UK writ large. Unless he starts a process of putting these individual reports into the wider context of his vision for the EU, this could become a painful process for David Cameron.

Italian Prime Minister Enrico Letta has announced he will tender his resignation to Italian President Giorgio Napolitano tomorrow. The dramatic development comes after Italy's centre-left leader Matteo Renzi addressed a meeting of his Democratic Party earlier today. A few minutes before Renzi took the floor, it emerged Letta would not be attending the meeting - a clear sign of where things were going.

The three key points of Renzi's speech were:

Letta has done a great job, but it's time to give way to a new government (that Renzi will lead);

Snap elections now would be too risky, primarily because the electoral law hasn't been changed yet;

The new government will aim to stay in office until 2018 - when the current parliamentary term expires.

It now seems certain that the 'staffetta' (relay) will materialise - and we expressed our thoughts on the move in our previous blog post.

So what happens next? If you're regular readers of this blog, you should know the drill by now - but just in case:

Letta will meet President Napolitano tomorrow, and will hand in his resignation;

Napolitano will then have to consult all the political groups holding seats in the Italian parliament. The timetable is usually announced after the Prime Minister resigns, but we reckon it could happen over the weekend;

After the talks, Napolitano should give Renzi the mandate to form the new government - presumably early next week;

After holding his own round of talks with other political leaders, Renzi should then unveil the list of ministers (we'd expect a rather substantial reshuffle from the current cabinet), and should be sworn in;

After being sworn in, Renzi will have to face a vote of confidence in both houses of the Italian parliament - which, as things stand now, should be a mere formality.

This is all you need to know to make sense of the latest political developments in Italy. For real-time updates, you can follow us on Twitter @OpenEurope and @LondonerVince.

Wednesday, February 12, 2014

Yesterday saw a debate between the EU's Europe ministers regarding the approval of Pioneer 1507 - a strain of genetically modified maize which has been developed by US firm DuPont to be pest-resistant. This is a fascinating case which sees the clash between EU legal procedures and scientific evidence on one hand, and public opinion and green lobbying on the other.

Unbelievably, DuPont first applied for EU approval back in 2001, but due to the political resistance to GM in the EU, this application was deliberately kicked into the long grass despite six separate positive opinions from the EU's food quango, the European Food Safety Agency. The wider context is a climate of political hostility which has resulted in Europe falling far behind the rest of the world when it comes to biotechnology - aside from Pioneer 1507 only one other GM crop has been approved in the past 15 years. The result is that biotech companies such as BASF and Monsanto have already left the EU and others could follow suit, with the loss of jobs, investment and trading opportunities.

Following a legal challenge by DuPont, the EU's General Court ruled that the EU was breaching its own rules by not taking a decision. Opinion among member states was divided, with five states including the UK minded to vote in favour, four including Germany minded to abstain and the remaining 19 minded to vote against (a formal vote was not actually held). Despite the large number of member states opposing the approval, no qualified majority was reached either way.

Under the EU's comitology process, when the result is indecisive, the Commission can chose to push ahead with its original proposal, and its looks set to do so (in fact during the debate the Council's legal service indicated it would be legally obliged to).

This is undoubtedly a problematic situation. On one hand, it is good that the Commission is heeding the independent scientific recommendation issued by EFSA. As EU Health Commissioner Tonio Borg argued during the debate, member states should not pick and chose when to follow such advice and when to disregard it. On the other hand it is bad from a democratic perspective when the Commission forces through something opposed by a majority of member states and public opinion - the EU was rightly slammed for proposing to ban jugs of olive oil from restaurant tables following a similarly inconclusive vote.

The case therefore illustrates the need for more flexibility in the EU on issues where member states cannot agree and where public sensitivities need to be taken into account. As UK Europe Minister David Lidington argued during the debate:

"I've no wish to force any country that doesn't want to cultivate this variety of maize to do so... in the longer term the answer surely has to be some agreement under which we agree that those member states that want to have GM crops in cultivation are free to do it while those maintain a ban are free to do so as well."

Greater flexibility for member states to ‘go it alone’ in designing appropriate regulatory frameworks for GM was also one of the recommended in the recent Fresh Start report on the EU's impact on UK Life Sciences. This would be a good compromise - that way it would be down to national governments and parliaments to decide whether to allow cultivation of GM crops - and it would be down to national politicians in favour of this to show the requisite leadership to win over public opinion.

‘Staffetta’ is the most used word in the Italian media these days. It literally means ‘relay’, and it refers to the

possibility of Prime Minister Enrico Letta handing over power to a new coalition government led by Matteo Renzi – the Mayor of Florence who was elected as the new leader of Mr Letta’s centre-left Democratic Party in December.

The change of government would not change the numbers in the Italian parliament, where no party holds a majority in the Senate, the upper chamber. Renzi may be able to muster wider parliamentary support than Letta, but he would still be stuck with a diverse coalition with smaller centrist and centre-right parties – meaning that the difficulties in pushing ahead any significant political and/or economic reform would not evaporate.

The handover of power would happen without an election, something which could backfire in terms of Renzi’s image vis-à-vis the electorate – not least because the Mayor of Florence has been clearly saying that he wasn’t keen on replacing Letta without a vote.

Therefore, a better option at this point might be to pass a new electoral law quickly and call snap elections. The electoral law currently being discussed is not perfect, but it would make sure that the winning party/coalition would secure a solid majority in both houses of the Italian parliament. It could be done in time for the beginning of Italy’s rotating EU Presidency on 1 July. Indeed, this would mean two months of political paralysis because of the electoral campaign. But despite all the good intentions, Mr Letta’s government has so far hardly delivered on the big reforms it was supposed to implement. Most importantly, at the end of the process Italy would have a government which has actually come out of the polls – rather than negotiations among party leaders.

"Did you know that 80% of Swedish laws are not Swedish laws? They are European laws that have been translated into Swedish legislation."

We've already examined this claim here, but it seems Reding is at best confused about the extent of EU legislation (worrying for an EU Commissioner) or being purposefully misleading.

UKIP's most effective recruitment sergeant?

Original post:

Where to start with Viviane Reding? She visited London yesterday as part of her so-called 'Citizens’ Dialogue' – which is neither about citizens nor a dialogue – and gave a very impressive performance. Somehow, she managed to offend absolutely everyone.

The British public by questioning whether they "know what they are going to vote about" in a potential 2017 EU referendum,

The British media by suggesting it “completely distorts the truth” over Europe,

The British government by rubbishing large parts of its strategy, most notably on the crime and policing opt out and EU free movement,

Europhiles by suggesting that “70% of the laws in this country are made, co-decided, by the European parliament" (meaning that the share of EU laws, according to Reding, must be higher since not all EU decisions are made jointly with national parliaments) – a “euro myth” that ivory-tower types in the UK have spent years trying to “dispel”, and ironically, used as Exhibit A in their accusations of “misinformed media” (“6.8% of primary legislation” and all that),

The Ukrainian protesters by praising their brave, pro-EU stance, and then later saying she has, unlike the UK, "never pushed for further enlargement" instead favouring deeper integration.

So in short, the British are too ignorant to vote, British media all misinformed and 70% of UK laws are made in Brussels. As one person put it on Twitter, it’s hard to think of better “rocket fuel for those who want to quit the EU”.

Apparently, Reding got her bag stolen from her car while engaging in the “dialogue”. Fortunately, her papers, hopefully including the source for the “70% of all laws” claim, were left untouched.

English knights seeking to protect their estates were a driver behind the creation of English Trust law.

MEPs are set to vote this Thursday on the 4th Anti-Money Laundering Directive - which aims to shed light into who owns private companies. This sounds positive and innocuous and the sort of thing politicians, including David Cameron, often - and rightly - call for. But the devil is in the detail. Some MEPs are reportedly now proposing to extend this 'transparency' into Trusts as well as companies, which could have major impact on UK business.

Making a register of the beneficial owners of all private companies, based on millions of underlying arrangements, changing on a day to day basis, was already looking to be complex. But when it comes to Trusts, transparency runs into a serious intellectual and practical problems. Who is the beneficial owner of a discretionary trust? How do you report that a spouse has an interest in a property/company - something that may only become apparent in a divorce court? Trusts encompass all manner of arrangements; trusts to protect children, trusts holding money pending a transaction, insurance policies, pensions, collective investment schemes etc. Without Trusts the UK's financial services industry would not be able to operate. Will MEPs really seek to have all this reported on a potentially public register? If it is indeed possible, reporting millions of ever changing arrangements could add a massive regulatory cost to everyone's financial affairs. Logic would dictate they would steer clear but lobbyists are already in full swing, pushing amendments that would radically increase the scope of the report.

This is also an important test for how the EU balances the interests of different member states. Trusts are a major innovation of the UK's, (particularly the English) legal system. Whereas continental legal systems traditionally tended not to look beyond the legal ownership of a property, the English legal system has taken a different approach, for better or worse dating back to the Crusades. Essentially, if you hand over the legal ownership of property to a relative in the expectation that you retain an interest (i.e when you come back alive from a Crusade) and it is not respected you could go to the King to receive justice - in the jargon you retained an 'equitable interest'. Other EU states have different set ups such as Stiftungs and Anstalts but these are not as widespread as UK Trusts.

What will happen? Well there are signs that some MEPs are aware of the problem, the EPP for one seems to be against, but David Cameron's ECR group (perhaps to save him embarrassment?) seems, for now at least, curiously undecided about coming out against these ideas.

This is not to say the English legal system should be exempt from transparency, but rather than EU politicians of all colours need to be acutelyy aware of the unintended consequences of regulating 28 different legal systems - with practices sometimes dating back centuries - with one broad brush.

Monday, February 10, 2014

We suspect the reverberations from the decision in the Swiss referendum to cap the number of EU migrants might be felt for some time (we look at what the long term implications could be for the UK here). The Swiss case is interesting because unlike the debate on migrants from Central and Eastern Europe in the UK, Germany and the Netherlands, it primarily affects citizens of the wealthier member states, primarily Germany, France and Italy. Here are some immediate reactions from around Europe.

The tone from the Berlin has been quite tough with Steffan Seibert, Merkel's spokesperson commenting that:

"The government takes note of the result and respects it but it is also the case, in our view, that it throws up considerable problems... It's in our interest to keep EU-Swiss relations as close as possible."

Foreign Minister Frank-Walter Steinmeier (SPD) added that "I believe that with this result Switzerland has harmed itself". He also dusted off the classic line so beloved of his predecessor in the post:

"there can be no cherry-picking when it comes to the EU"

The new FDP leader Christian Linder echoed this sentiment arguing that "The Swiss are taking from the European buffet only that what they want" (which is kind of the point of a buffet). Interestingly however he added that he was "open-minded" about having more referenda in Germany.

Meanwhile Alternative für Deutschland leader Bernd Lucke didn't explicitly argue for capping EU migration although he struck a different tone compared with the established German parties, arguing that:

"Irrespective of the result of the Swiss referendum we can also achieve in Germany an immigration law which is based on qualifications and he ability to integrate while preventing benefits migration... If necessary we could have such referendums [in Germany]."

The least diplomatic response came from Ralf Stegner, leader of the SPD faction in Schleswig-Holstein who took to twitter to describe the Swiss as "crazy".

The response in France has also been quite tough with Foreign Minister Laurent Fabius arguing that:

“This is bad news for Europe and the Swiss, because Switzerland will be penalised from withdrawing into itself... There’s a so-called ‘guillotine clause’ establishing that if one of the elements [of the Swiss-EU bilateral deal] is put into question – in this case, the free movement of workers – everything falls down. Therefore, this means we’ll have to renegotiate […] This means we’re going to reconsider our relations with Switzerland.”

“It would be totally incomprehensible if Switzerland put a barrier to the access of cross-border workers… On the other hand, that [Switzerland] wants to reduce the overall number of foreigners on its territory is a perfectly natural demand.”

However, his fellow party member Roberto Cota – the governor of Piedmont – voiced concern over the future of cross-border workers from his region, claiming that:

“Respect is needed, because we’re talking about honest and regular workers. Together with [Roberto] Maroni [the governor of Lombardy, another senior Lega Nord member] we’ll request a meeting with [Italian Prime Minister Enrico] Letta on this issue as soon as possible.”

UK Foreign Secretary William Hague was quite restrained, commenting that he did not want to prejudge the results of the negotiations, adding that:

"We will be mindful of the position of 40,000 British nationals who work in Switzerland".

Irish foreign minister Eamon Gilmore warned that “We are seeing signs of the rise of the far-right in Europe” while the Luxembourgian foreign minister Jean Asselborn has been the most outspoken, claiming that the vote has put the Swiss in “good company” with people such as Marine Le Pen, the leader of the French Front National.

There have also been some strong responses coming out of Brussels with EU Commission spokeswoman Pia Ahrenkilde-Hansen commenting that:

"The message is clear today: free movement of people is a sacred right for the EU... This will clearly have implications for the rest of the agreements [with Switzerland]."

EU Justice Commissioner Viviane Reding, never knowingly understated, argued that "the single market is not a Swiss cheese. You cannot have a single market with holes in it" which is a silly statement given that the Swiss trading relationship actually is a bit like a Swiss cheese, with patchy market access in services, for example.

The response from MEPs is also interesting as they might have a say in the negotiations (although this is a bit of a grey area). While EP President Martin Schulz was relatively restrained, other senior MEPs were quick to stick the boot in.

Disappointing Swiss referendum will lead to disadvantages for CH in new negotiations with EU. #abst14#CHvote
— Hannes Swoboda (@Hannes_Swoboda) February 9, 2014

So a lot of posturing. These negotiations will be very, very interesting...

In a referendum
yesterday, the Swiss voted by a narrow margin in favour of restricting
immigration from the EU. Switzerland is not an EU member but via around 100
agreements, Switzerland is partly integrated into the EU, including in the
contentious area of free movement of workers.

Ukip’s Nigel Farage has been quick to stick the boot in,
calling the vote "wonderful news for national sovereignty and freedom
lovers throughout Europe." Equally predictable, Vivanne Reding – Vice
President of the EU Commission – said that while "we respect the
democratic vote of the Swiss people… The single market is not a Swiss cheese.
You cannot have a single market with holes in it."

Which is a silly statement. One of the basic flaws with the
Swiss trading relationship with the EU is precisely that it suffers from holes,
including patchy market access in areas such as services, making it a sub-optimal model
for the UK to follow. But Reding’s comments still highlight what an important
test case this will be of the feasibility of the pick and mix relationship with
the EU from outside, which the UK might have to adopt should it leave the EU.

Here it gets tricky. The Swiss-EU agreement on free movement
was part of a bundle of agreements known as Bilaterals I, which also covered
six other areas including market access for various Swiss exporters and firms,
from trade in agricultural products to civil aviation. Crucially, it contains a
"guillotine clause: which says that that the contents – including the
market access – can only take effect together: if one of the agreements is
terminated, the others would also cease to have effect. This sets Bern up for
very difficult talks with Brussels. If the EU wants to play hardball, it could
scrap the entire agreement.

There are a huge number of issues captured in the Swiss
vote: support for immigration in Europe, the risk for an open economy in
erecting new barriers to the world (think labour costs), how the EU responds to
referendum results and much more. However, for the UK the implications are
clear. If this escalates into other areas of Swiss-EU trade, including
restricted market access, many in the UK will argue that a “pick and mix” deal
with the EU will be hard to pull off. If, on the other hand, Switzerland was
able to renegotiate its relationship to impose some form of restrictions on EU
migration, however minor, those who favour UK exit would no doubt see it as a
politically palatable precedent.

The Swiss referendum question doesn't specify what shape the
immigration quotas would take, but only instructs the Swiss Parliament to draft
legislation addressing the issue within the next three years. Much can still
happen. However, no matter what, the EU will most certainly negotiate any
revised deal with one eye firmly fixed on London, worrying about giving the
Brits ideas. And for anyone with even the slightest interest in Britain’s
future place in Europe, this is a key one to watch.